The new Companies Act, which came into effect on 1st May this year, impacts the audit requirements of Close Corporations (CCs). CCs that are deemed to be in the public interest are now required to be audited, or at undergo an independent review.
So what does it mean to be in the public interest?
The term public interest means the common wellbeing and general welfare of the business and investing community. This concept suggests that the manner in which the CC is managed could have an impact on the common wellbeing and general welfare of the business and investing community.
In a nutshell this means that your Close Corporation could be large enough to have an impact on the business community. And if so it will have to undergo an audit.
What is a public interest score?
Public interest scores are calculated against a set formula that takes into account the number of employees, annual turnover and the number of individuals who have a direct or indirect interest in the company’s securities, to name a few criteria. The final score determines the type of review the CC’s annual financial statements will have to undergo.
Public interest scores must be calculated at the end of each financial year. See our Public Interest flow scorecard to easily understand your responsibilities.
How do I know if my CC needs to be audited?
The score is always calculated the same way but the final number is interpreted differently for different types of businesses, so a CC is scored differently to a public company for example.
A score equal to or greater than 350 will require an audit.
A score between 100 and 349 means that the annual financial statements of the CC must undergo an independent review. This is when the financials are prepared by a professional accountant that is independent of the CC. If the accountant is an employee of the CC then an audit will be required.
For a score lower than 100 points, an accounting officer’s report needs to be submitted but the practitioner who completes the report must be entirely independent of the CC.
Don’t make assumptions
We all assume that CCs are owner managed but this isn’t always the case. For example, Close Corporations can be owned by a trust and not all of the trustees are members of the Close Corporation. In this case the CC will be subject to an audit or an independent review.
So it is important for the members of Close Corporations to structure their affairs around the public interest score and whether they are owner managed or not, as this could have a serious impact on their accounting and auditing fees.